Row crops such as wheat and corn have long been a staple of
farmland portfolios. But some investors hope to
harvest greater rewards by diversifying into the so-called
permanent crops: fruits and nuts that grow on trees and
vines.

This farmland comes with higher risks. It takes years for a
tree or vine to become productive, and consumer tastes can
change in the meantime. Thats what happened with Red
Delicious apples, notes James McCandless, head of global real
estate, farmland, at UBS AgriVest, a division of UBS Global
Asset Management. About 100,000 acres of Red Delicious
turned into firewood because people decided they liked
Galas better, says McCandless, whose Hartford,
Connecticutbased firm had almost $1 billion invested
in farmland as of March.

But the potential returns are higher too. The nut group
 almonds, pecans, pistachios and walnuts  is
particularly strong thanks to health-conscious consumers and
exports to a growing middle class in emerging markets. In
California theres a boom in the conversion of farmland
from low-value annual crops like wheat, corn and
barley to permanent ones, especially nuts and wine grapes, says
Karen Klonsky, an outreach specialist in the Department of
Agricultural and Resource Economics at the University of
California, Davis.

The NCREIF Farmland Index, from the Chicago-based National
Council of Real Estate Investment Fiduciaries, has posted a
ten-year annualized return of 17.57 percent, including income
and land appreciation. But for income, permanent crops rule. At
the recent Global AgInvesting conference in New York, Rory
Robertson, CEO for horticultural crops with Westchester Group
Investment Management, used the NCREIF index to show that these
crops annualized income has climbed from 13.06 percent to
18.28 percent in the past decade. Income from annual cropland
has hovered at about 4 percent.

TIAA-CREF, which bought a controlling stake in Champaign,
Illinoisbased Westchester in 2010 for its farmland
management skills, has a long-term strategy to split crop
investments 70-30 between row and permanent, says agriculture
portfolio manager Justin (Biff) Ourso. The $569 billion,
New Yorkbased investment firm had about $4.5 billion in
farmland assets at the end of 2013. TIAA-CREFs permanent
crops include wine grapes, almonds, walnuts, pistachios,
citrus, apples, avocados and cranberries, Ourso says.

With row crops TIAA-CREF buys the land and leases it back to
farmers who assume the risk, but it manages permanent crops
itself via Westchester. The investment in the trees or vines is
considerable  anywhere from 50 percent to 80
percent of the value of the farm, Ourso explains.

UBS AgriVest would like to put about 20 percent of its total
capital into permanent crops. So far, the firm has allocated
just 11 percent because its been difficult to find
attractively priced permanent crop properties, farmland
head McCandless says. But it recently invested $14 million
and $7.6 million in California vineyards and apple
orchards, respectively, and $13.25 million in Florida
citrus groves. UBS AgriVest leases all of its land back to
farmers. The lease structure differs for permanent crops,
though: The firm gets a percentage of gross income, McCandless
says.

King, who grew up on a farm in Colusa, California, left MCP
Asset Management Co., a Hong Kongbased hedge fund he
co-founded, to launch Arbor Nutrio last November. Already the
owner of almond and pecan orchards in California worth about
$25 million, he plans to buy California walnut and pistachio
properties, and pecan farms elsewhere in the U.S., with an
emphasis on shelling and marketing the nuts. So far, King has
put up his own money, but hed like to raise
$100 million starting in the fourth quarter, via a
commingled fund or with two or three investors.

Jamie Shen, a senior vice president at San
Franciscobased Callan Associates, an investment
consulting firm that advises on nearly $2 trillion in
assets, says institutional demand for farmland is so strong
that she knows of three asset managers with a combined
$1.4 billion sitting on the sidelines. It will be a
struggle to invest that money, Shen predicts. A lot of
farmers are flush with cash and are looking to expand,
she says. The biggest competition is the farmer next
door.  